<font color=red>Capex spending cuts could cause shortages
By Bolaji Ojo
EBN
(11/09/01 14:49 p.m. EST)
It's well into November and component suppliers struggling to restore profitability are still unsure about their 2002 capital spending plans.
Even the handful of companies that have provided guidance warned budgets will be sharply scaled back for the second consecutive year, potentially resulting in spot shortages within the next nine to 18 months, according to some estimates.
“We're in a very difficult time, and we're about to repeat the mistakes that the industry has made multiple times in the past where we are going to go into a period of underinvestment,” said Derek Lidow, president and chief executive of iSuppli Corp., El Segundo, Calif.
“A bottleneck or shortage in one area in our industry tends to ripple through and then all of a sudden capital equipment decisions that were made under the assumptions that you could get all the parts to make your products are no longer valid,” Lidow said.
By all accounts, the task of determining 2002 capital expenditures at the leading semiconductor companies is not going very well, according to industry sources. Executives are uncertain of what next year holds and therefore can't justify equipment purchases, especially when plants are running at only 50% capacity. Cutting expenses, including purchases of equipment to produce parts for the next upturn, is the short-term solution.
“When you don't know, when you don't have feasibility, it's easier to cut [capex],” said Jean-Philippe Dauvin, group vice president and chief economist at STMicroelectronics Inc., Geneva.
“Now we're living in the CFO paradise. It's cut, cut, cut.”
How big are these cuts and what impact will they have on the industry by the end of 2002? Only the first part of this question can be easily answered. In 2000, semiconductor capital equipment spending shot up to a record $61.3 billion, a 69% increase over the 1999 number, according to Converge Inc., Peabody, Mass.
However, by the end of this year, this number will have dropped by 40%, to between $37 billion and $39 billion, according to VLSI Research Inc., San Jose, and ST's Dauvin. Another 20% decline in 2002, to $29 billion, would leave the industry on the cusp of undercapacity, Dauvin said.
“When capex falls to about $28 billion, or less than 20% of sales, you're in a sub-critical zone, which means you may see some undercapacity in the second half of 2002,” Dauvin said. “In 2002 we'll move from synchronized recession to synchronized recovery, [and] during the same time available capacity will go down and down.”
For now, component suppliers can't see it that way, nor do their customers, who are currently concerned about end-user demand. Still, OEMs should start to pay attention to their key partners' capital spending plans, according to analysts.
“Chip companies are both delaying fab projects and closing existing fabs,” said Grant Johnson, manager of information services at Converge, in a research report. “The semiconductor industry has displayed a poor track record of keeping oncoming capacity in sync with aggregate market demand. The industry is all about timing and understanding when to make that investment.”
Many industry executives are uncertain about when to make the next major investment, partly due to the frail market, which has led to projections that global chip sales this year could fall more than 31%, to $141 billion, according to the Semiconductor Industry Association.
Also, suppliers are more wary about adding capacity this time from lessons learned in the past. Under pressure from OEMs, suppliers a couple of years ago added new plants and expanded old ones only to be left in the lurch by troubled customers.
“In 1999, everybody started telling us 'buy more equipment, we need more product,' so we got enthusiastic and bought too much equipment,” said Felix Zandman, chairman and chief executive of Vishay Intertechnology Inc., Malvern, Pa. “We have a whole system of intelligence and the outcome is that we are stupid. Marketing depends on if the public wants to buy, and God knows the psychology of the public.”
Economic uncertainty
The sluggish economy is also affecting investment decisions. Traditionally, equipment budgets are finalized in the third quarter, but that's not the case this year. Executives at chip suppliers, including Intel and Motorola, have declined to provide specific figures for 2002.
“Given the current economic conditions and the events of Sept. 11, we said we'll not be providing any guidance at this time,” said a spokesman for Motorola Inc., Schaumburg, Ill.
Some other companies have been a bit more forthcoming about their expected 2002 capital equipment budgets, although many of them, including Advanced Micro Devices Inc. and Taiwan Semiconductor Manufacturing Co. Ltd., are keeping estimates unchanged or lower on a year-over-year basis.
Unofficial estimates from ST and Texas Instruments Inc. indicate significantly lower estimates for 2002. For instance, ST expects to spend between $1 billion and $1.3 billion in 2002, down as much as 41% from $1.7 billion in 2001, while Dallas-based TI projects capital investments of $1.2 billion for 2002, one-third of the $1.8 billion budgeted for this year.
“Only a couple of companies have made indications about their capex, because many executives really don't know what to expect,” said Dan Scovel, an analyst at Needham & Co. Inc., New York.
“They're struggling but they still have to answer these questions: 'What sort of business are we expecting? How much do we need to spend to achieve the business goals we have in mind? How do we fund it?' ”
These questions have haunted the semiconductor industry through several downturns and are yet to receive any satisfactory answers. At Vishay, where plants are currently running at 50% of capacity, there's only one item to consider before raising capacity: an improvement of 50% in sales, according to Zandman.
“If the capacity [utilization] comes up to 75% or so, and is growing, this will be the time to buy new equipment, but not before,” he said.
This approach does not take into account the ongoing depletion of excess inventory, a process that forced OEMs to cut back on new orders, according to iSuppli's Lidow.
“What isn't obvious is the fact that the inventory sitting in the pipeline is the reason why demand is off so much and it's getting worked off,” Lidow said. “We'll see in the industry short-term shortages start occurring in the second half of next year because there isn't the skilled labor still on the assembly lines to make the products as the inventory bubble burns off.”
Additional reporting by Darrell Dunn |
